Supply Chain Managers Must Continue to Deal With Modest Gains in Productivity

In its preliminary fourth quarter “Report on Productivity and Labor Costs,” IHS Global Insight U.S. economists suggest that both hiring and productivity will move upward…but at a snail’s pace.

“The expiry of the payroll tax cut and other headwinds have left further acceleration in employment growth over the next few months unlikely,” said economist, Erik Johnson. “But the underlying fundamentals in the economy are trending upward, and 2013’s employment growth should at least match 2012’s.”

As expected, nonfarm labor productivity declined by 2.0% in the fourth quarter. Nonfarm business output grew by just 0.1% annualized, the worst showing in nearly two years, even as employee hours were up 2.2% over the previous quarter. Year-on-year, productivity growth was just 0.6%, the slowest pace of 2012. For 2012 overall, productivity growth was 1.0%, compared with 0.7% in 2011 and 3.1% in 2010.

After two quarters in which hiring lagged behind output growth, the tables turned in the fourth quarter. Despite all the fears over the fiscal cliff, employers added an average of 201,000 jobs per month, compared with 152,000 in the third quarter. Real GDP contracted, however, in part due to massive but temporary corrections in defense spending and inventories.

Coming out of the recession, companies slashed payrolls and worked their existing employees to the bone – this would explain the strong productivity figures we saw in 2009 (3.0%) and 2010 (3.1%). But firms have squeezed about as much as they can out of their workforces and have resorted to hiring more in order to raise output. Thus, productivity growth has been relatively muted over the past two years.

“With fiscal concerns lingering and foreign growth issues persisting, we expect both output and hiring to trend up modestly,” said Johnson. “We expect a first-quarter rebound in output growth and gradual improvement thereafter. The result: productivity should grow around 0.5% in 2013 and drift up slowly, but it will be years before productivity returns to its long-term trend rate of 2%.”

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